Pfizer Deal Highlights U.S. Pharma Trend for Targeted M&A

Pfizer’s proposed acquisition of Medivation highlights the trend of large innovative U.S. pharmaceutical firms continuing to pursue targeted acquisitions rather than large transformative ones, according to Fitch Ratings.

Consolidation continues as big pharmaceutical firms search for scale and efficiencies. However, as the number of new drugs in the pipeline increases, and manufacturers face manageable patent expiry risks, large acquisitions will become less necessary. We expect larger manufacturers to seek out individual therapeutics and smaller biotech companies through targeted acquisitions and partnerships designed to strengthen innovative drug portfolios.

Pfizer’s deal announced this week is a good example. Medivation sells a prostate-cancer drug with significant growth potential in the oncology space and has two pipeline products. The all-cash deal for approximately $14 billion will be marginally positive for Pfizer’s leverage as the company will fund the acquisition with balance sheet cash while acquiring EBITDA from a product that is already on the market and growing. Notably, acquisitions and share repurchases during the past two years have strained leverage. However, the acquisition will be modestly negative for liquidity, which is generally solid given Pfizer’s strong FCF generation and ample access the credit markets.

Whether Pfizer will retain, spin off or sell its Global Established Pharmaceuticals business remains unclear. The company has said it will assess the merits of a separation by year-end 2016. We would view a divestiture as strategically positive for Pfizer, as it would narrow the company’s focus on its higher margin, innovative portfolio. However, the business model would be more reliant on its innovative drug discovery efforts, and it remains unclear whether the company would take a more conservative capital structure.

Pfizer’s acquisition of Anacor in June is another example of a recent targeted acquisition. Anacor’s eczema treatment crisaborole will be an important near-term asset for the company. Other transactions include Bristol-Myers Squibb’s acquisition of Padlock Therapeutics, which could expand its presence in the treatment of rheumatoid arthritis. In its acquisition of Glycostasis, Inc., Eli Lilly looks to develop a form of insulin that self-releases when a diabetic patient’s blood-sugar level is too high.